In Noel v. New York State Office of Mental Health Central New York State Psychiatric Center, an employee sued his employer under Title VII and won a $318,217 judgment. Part of that judgment included $280,000 for back and front pay. The employer sent a check directly to the employee for the net amount after withholding of $139,582.

The employee returned to court and argued that he was entitled to the full award. Stating that since the settlement was a jury award the payment wasn’t wages subject to withholding because was a judgment against a liable party. The employer, argued that according to the tax code that the award was taxable wages—and the Internal Revenue Service took the employer’s side. The trial court ruled in favor of the employee and instructed the employer to repay the withheld taxes.

However, the federal appeals court reversed that decision and ruled that the award was wages and subject to withholding. Stating that Title VII awards for back and front pay are wages, and employers have a duty to withhold federal and state income taxes and FICA taxes.

This is a good illustration to employers who are involved in employment litigation. Ensure that your management and HR personnel know that back and front wages are subject to withholding and fully taxable. And settlement agreements should include language that clearly spells this out so there is no confusion regarding the taxability of payments.

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Whenever possible, it is preferable to avoid litigation with current and former employees. However, when you need to go to court an experienced NY employment law attorney be an invaluable resource. If you are facing an employment lawsuit or investigation or if you need help to avoid employment disputes contact us online or call 718-275-6700 to schedule a consultation today.